BHP Billiton Limited (ADR) (BHP): This Giant Seems Well Positioned for a Turnaround

Due to the falling demand (and prices) of most industrial commodities over the last year, BHP Billiton Limited (ADR) (NYSE:BHP) has been beaten down severely. Since it’s a well-diversified natural resources company, most of its divisions have been reporting declining revenues. To sustain its expensive operating structure (and to expand), BHP Billiton Limited (ADR) (NYSE:BHP) has been raising debt over the last couple of years (perhaps a bit too much). Yet, there seems to be hope for BHP Billiton.

Debt refinancing

BHP Billiton had net cash of $200 million in 2010, which quickly deteriorated to a net debt of $30.4 billion by the end of 2012. Its long-term debt currently aggregates to around $28.33 billion with annual interest expenses of $470 million. BHP Billiton Limited (ADR) (NYSE:BHP) will have around $2 billion-$4 billion of annual debt maturities till 2018, which are expected to dwindle down to around $1 billion each year henceforth.

With plunging earnings, inflationary pressures, and interest expenses eating up potential earnings, debt refinancing seems to be the only way out for BHP Billiton Limited (ADR) (NYSE:BHP) (at least for now). In April, the company raised $950 million from Europe (bonds) at 3.125% with a 20-year term as compared to its existing interest rate of 3.53% attached to its 15-year Australian bonds.

The company also raised $734 million this month by issuing 10-year bonds at an interest rate of 3.23%. As of now, these interest savings are not enough to root out its long-term debt problems, but taking advantage of low interest rates is always a wise choice.

Cutting down on expenses

Besides restructuring, financially troubled companies move towards cutting costs. Brazilian mining behemoth, Vale SA (ADR) (NYSE:VALE). has lost 26% of its market cap this year due to falling prices of industrial metals. The depreciating Brazilian Real is another major concern. Although Vale exports most of its iron ore, the depreciating currency has inflated its international debt which has been weighing upon the company. As a result, its net profit fell 18%. But, the results were better than expected as Vale SA (ADR) (NYSE:VALE) was able to save $3.6 billion in annual costs.

Rio Tinto plc (ADR) (NYSE:RIO) is another financially troubled mining company with its towering debt of $33 billion. To repay its liabilities and navigate through troubled times, management of Rio Tinto has come forth with a $5 billion worth of annual cost saving plan.

In a similar manner, BHP Billiton Limited (ADR) (NYSE:BHP) is also planning to save $1.9 billion in annual costs in FY14. Its capital and exploration expenditures would be reduced to $18 billion, which is an 18% reduction. Adding to the delight, management announced that its cost cuts would be deeper (and bigger) in the subsequent years, which presents an optimistic outlook for the company’s financials.